What Is the Paycheck Protection Program Flexibility Act?

What Is the Paycheck Protection Program Flexibility Act?

When COVID-19 forced closures in March of 2020, many small businesses suddenly found themselves without any income. The Paycheck Protection Program was announced as part of the CARES act specifically to provide some relief. A PPP loan would cover the payroll of small businesses and later be forgiven if the business met certain requirements.

The program was later amended with the Payment Protection Program Flexibility Act in June. The primary purpose of the amendment was to relax some of the original requirements of PPP. But what does that mean for borrowers?

Updated Requirements of the Payment Protection Flexibility Act

The PPP Flexibility Act offers more flexibility in the spending and timeframe for their loan proceeds. 

Borrowers were given more time to spend their loan funds, extending from 8 weeks to 24 weeks. Borrowers could also spend their funds on more than just payroll, dropping the requirement from 75% to 60%.

The repayment period for the loans was extended from two years to five years. Loan forgiveness is still possible for businesses, even if they did not fully restore their workforce. Additionally, considerations were given if the business was unable to return to pre-COVID levels of operation.

The PPP Flexibility act also extended the deadline for the Payment Protection Act loan application.

Challenges Obtaining a PPP Loan

While the PPP loans were available through two acts from Congress, many small businesses found it difficult and frustrating to obtain such a loan. Banks would often reject borrowers that did not have an existing relationship. There were also bottlenecks in the approval process.

Providing the right documentation was another headache. Guidance from the SBA was continuously updated and confusing. Borrowers found themselves stressed to ensure that they had everything in place for full forgiveness.

Banks struggled as well. Obtaining documents from borrowers and tracking SBA requirements became a nightmare. Banks found themselves only able to approve a certain number of borrowers, forcing many small businesses to look for a lender that would work with them.

Technical difficulties in submitting SBA loan applications only added to the headaches. PPP money ran out in six days in the first round of funding, and the SBA stopped accepting applications on August 8th, 2020, for the second round.

The Ongoing Struggles of Small Businesses

Many small businesses in the U.S. are in dire situations. 70% are facing financial hardship, and 58% fear that they might have to permanently close due to the impacts of COVID-19, according to the U.S. Chamber of Commerce.

To remain viable, many companies have needed to rethink their business model. Their products, services, and interactions with customers look different today than they did pre-COVID.

However, the reality is that these changes may not be enough. With the entire economy impacted, consumer needs have also changed.

What Types of Loans Can Help?

Small businesses may find that they need a capital investment to make the necessary changes. Additionally, their sales or services may not have returned to sustainable levels.

There are many types of loans available that could help, including:

  • Short Term Loans
  • Lines of Credit
  • Merchant Cash Advances
  • Invoice Factoring
  • Equipment Financing
  • Working Capital Loans
  • SBA Loans

Lenders can help a business evaluate what type of loan might be best for their needs.

Traditional Financing May Fall Short

Banks have the ability to make loans to these small businesses, even outside of PPP. However, risk assessment is part of the approval process. A struggling business may find that traditional lending is not an option because the bank is unwilling to lend. 

If a new loan cannot be approved, banks may instead find that they are dealing with their borrowers’ past due loans.

If small businesses continue to fail, the impact on the economy will deepen.

The Financing Approval Process

Small business should look for lenders that are able to respond quickly to their needs. Questions that borrowers should ask a potential lender include:

  • How do I apply for the loan? Is the loan application online?
  • What are the eligibility requirements?
  • What documentation is needed to apply?
  • How soon can the loan be approved?
  • How quickly will I receive funds?

If the response to the timing of the last two above is “weeks,” – then the bank is likely not responsive enough to meet the needs of the borrower. Weeks could mean the difference between survival and failure.

Alternatives to Bank Financing

Fortunately, banks are no longer the only option for receiving financing. Small businesses can leverage alternatives to traditional bank financing to solve their cash flow problems.

Online lenders are quick to approve and make funds available to their borrowers. While many traditional banks need to present loans to a committee for approval, other lenders have automated this process through online portals and applications.

The documentation requirements are generally less. Small businesses can focus less on gathering piles of documentation and more time on running their business.

Collateral requirements are also different with alternative financing. Banks will typically want collateral for a loan, even if it is in the form of a guarantee from the owners. Many times, alternative financing does not require collateral.

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